Can newer services help create more jobs, prosperity for India?

India’s manufacturing-to-GDP ratio for the July-Sept quarter stood at 17.1 per cent. This ratio has largely moved in the 16-17 per cent range for more than a decade now.

Now, in comparison, data from the World Bank tells us that China had a manufacturing-to-GDP ratio of around 28 per cent in 2022. It was 32 per cent before 2012. In Vietnam, the ratio was 25 per cent in 2022.

Why is this important? Countries that grew at a fast pace after WWII have done so by expanding their manufacturing base and producing goods for the rich countries of North America and Europe. The export focus was necessary given that the domestic market was small and wouldn’t allow local manufacturing firms to achieve scale and push up productivity. Further, by doing this, countries could cash in on their comparative advantage of cheap labour, which the rich countries had lost.

Countries that benefitted by using this formula were Japan, South Korea, Taiwan, Malaysia, Thailand, Indonesia and, obviously, China. The initial manufacturing focus was on sectors that needed low skills, like clothes, shoes, etc. As Vijay Joshi writes in India’s Long Road -- The Search for Prosperity: “China’s export share in world markets for clothing and footwear rose from 1.3 per cent in 1980 to an astonishing 37.6 per cent in 2007. During the same period, India’s share went up from 1.4 per cent to 3.2 per cent.”

This created demand for labour and helped countries move workers from agriculture toward a more productive manufacturing sector. As workers became more skilled, countries could manufacture more sophisticated goods “such as cameras, motorcycles, cars and machinery.” Raghuram Rajan and Rohit Lamba make this point in Breaking the Mould -- Reimagining India’s Economic Future.

This formula helped quite a few countries in Asia increase their per capita income at a rapid pace. Given this, it isn’t surprising that economists have been recommending a similar strategy for India as well, in order to create jobs for India’s youth.

Also, it is said that China no longer enjoys the labour cost advantage that it used to. But Rajan and Lamba say that may not be true. China has a population almost as large as that of India and still hasn’t exhausted its reservoir of cheap workers in agriculture, especially in its western provinces. So, in that sense, Indian workers looking to latch on to the manufacturing bandwagon are not competing with workers of rich countries but with workers of China and other countries like Vietnam, which are already big in the manufacturing game. Also, these countries have their logistics in place.

Further, over the decades, the structure of global trade has changed. As the World Trade Report for 2013 points out: “A central feature of this…age of globalisation is the rise of multinational corporations...Upwards of two-thirds of world trade now takes place within multinational companies or their suppliers -- underlining the growing importance of global supply chains.” And there is tough competition in almost every segment of the manufacturing portion of these supply chains and profits have been competed down, implying that the low-hanging fruits have already been taken. Further, in the aftermath of Covid, many rich countries are looking at reshoring by producing stuff within the country, making the merchandise exports game more difficult than it was.

So, what should India do in the days to come? While concentrating on increasing the manufacturing base might be the popular thing to recommend and do, and of course, cannot be ignored, services need adequate attention as well. Take the case of the recent success story of global capability centres (GCCs) or offshore units of MNCs that operate out of India. India has got around 1,600 such centres and they employ close to 1.4 million individuals. Data from the India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry, suggests that two new GCCs are created every week. It is expected that by 2026, India will have 2,000 GCC employing 2 million individuals. Of course, this will be direct employment. A lot of indirect employment will be created around this, everyone from domestic helps to drivers to security guards to cooks and more, will be required.

Now, as data from the real estate consultant JLL suggests, nearly 55 per cent of GCCs operate out of Bengaluru and Hyderabad. The newer GCCs need to be encouraged to set up in smaller cities that are not already under pressure as some of the larger cities are. It will also help spread the benefits of growth better.

Further, Rajan and Lamba feel that services that are intertwined with manufacturing will help create good jobs. They offer examples of companies like ID Fresh Food, which makes and sells idli and dosa batter among other things; Lenskart, which makes and sells spectacles; and Tilfi, which makes and sells Banarasi sarees. As they write: “Employment creation in services can be substantial, but many will be in small and medium enterprises.”